Why Every Retailer Needs An Online Marketplace

Transcription

1 FOR: ebusiness & Channel strategy Professionals Why Every Retailer Needs An Online Marketplace by sucharita Mulpuru, May 23, 2012 Key TaKeaWays Both ebusinesses and Consumers are adopting Marketplaces Over the past few years more traditional retailers, driven by the pressure to find new ways to drive profitable revenue, are exploring marketplaces. The time is right as consumers have become comfortable buying from marketplaces and execution is easier than ever. The online Marketplace Business Model is Not Just another dropship program Superficially, marketplaces bear many similarities to drop-ship programs, which many retailers already deploy to avoid buying and storing heavy or bulky items in their inventory mix. However, there are key differences between drop-shipments and marketplace shipments involving revenue attribution, breath of inventory, and customer service. Retailers Love Marketplaces For Many Reasons While product selection is widely cited as the core reason for implementing a marketplace, the marketplace model offers numerous strategic advantages to retailers like incremental revenue and margin, improved customer service, and a new way to test and feature products that are otherwise restricted. To ensure success, dedicate a Team To Manage The Brand implications The marketplace model requires focus upfront to ensure that third-party merchants and shoppers are well supported. That means you must have a dedicated team addressing the following: choosing third-party merchants carefully; working hard to create strong partnerships; and making sure the service component is clearly defined. Forrester Research, Inc., 60 Acorn Park drive, Cambridge, MA UsA Tel: Fax:

2 May 23, 2012 Why Every Retailer Needs An Online Marketplace by Sucharita Mulpuru with Sabine Poltermann, Patti Freeman Evans, and Myriam Da Costa Why Read This Report Multichannel retailers that are looking to compete effectively with aggressive pure-play counterparts that often offer cutthroat pricing or shipping programs will find that the marketplace model is a compelling opportunity; marketplaces provide broader assortments with lucrative margins and are less onerous to deploy than in the past. This report will outline why marketplaces are gaining popularity, what the benefits are of launching a marketplace, which resources are needed to launch a marketplace, and what ebusiness executives should apply to run a successful marketplace. We recommend that you also read Brian Walker s report How To Build An Online Marketplace in conjunction with this report. Table Of Contents 2 Third-Party Marketplaces Are Gaining Popularity Amazon s And ebay s Success Force Other Retailers To Wake Up To Marketplace Value Market Forces Combine To Make Marketplaces Newly Attractive Online Marketplaces Look Like Drop-Ship Models But Are Not The Same Retailers Love Marketplaces For The Flexibility And Margin They Offer A Few Key Success Factors Are Critical For Marketplace Success Marketplace Success Can Be Measured By Key Performance Indicators recommendations Marketplaces Can Be Powerful, If They Are Executed Well Supplemental Material Notes & Resources Forrester interviewed nine vendor and user companies, including Barnes & Noble, Best Buy, Buy.com, JTV, Merchantry (formerly Ixtens), Neckermann Germany, Pixmania, Tesco, and Tradebyte. Related Research Documents How To Select A Commerce Services Provider February 9, 2012 Google, Amazon, Apple, And Facebook: What ebusiness Executives Need To Know For 2012 February 7, 2012 European Online Retail: Five Trends To Watch In 2012 February 3, 2012 Trends 2012: US Retailer ebusiness January 13, , Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. To purchase reprints of this document, please [email protected]. For additional information, go to

3 Why Every Retailer Needs An Online Marketplace 2 Third-party Marketplaces Are Gaining popularity Online marketplaces aren t new companies like ebay have been a repository of inventory fulfilled by third-party merchants for many years but only more recently have traditional multichannel retailers explored the opportunity to create a marketplace for their own businesses. While retailers have historically wanted to buy their own products and fulfill them from their own distribution hubs, changing dynamics within the retail industry have forced them to reconsider their past approaches. Amazon s And ebay s Success Force Other Retailers To Wake Up To Marketplace Value Amazon.com in particular continues to take market share away from other web retailers and from traditional brick-and-mortar stores in large part because of aggressive online offers (e.g., lower prices, low-cost and rapid shipping). Amazon can provide such aggressive offers because its online marketplace is not only extremely profitable, but it also helps to subsidize the company s aggressive offers. By now Amazon sells approximately 36% of its total units via its marketplace. 1 Companies such as Sears, Wal-Mart, and Best Buy in the US and Neckermann in Germany have recognized that to compete with Amazon, they too need to institute marketplaces on their own sites (see Figure 1). Figure 1 Many Of Amazon s Competitors Are Launching Marketplaces 1-1 Sears marketplace Sears marketplace sellers have their own Storefront. Shoppers can search among all products or for products sold only by Sears. Source: Sears website Source: Forrester Research, Inc.

4 Why Every Retailer Needs An Online Marketplace 3 Figure 1 Many Of Amazon s Competitors Are Launching Marketplaces (Cont.) 1-2 Quelle (DE) marketplace After bankruptcy Quelle, a former catalog retailer, was reborn as a marketplace platform. Nowadays third-party merchants use the brand name to promote their products. Source: Quelle website Source: Forrester Research, Inc.

5 Why Every Retailer Needs An Online Marketplace 4 Figure 1 Many Of Amazon s Competitors Are Launching Marketplaces (Cont.) 1-3 Barnes & Noble marketplace Barnes & Noble took an Amazon-like approach offering its shoppers multiple sellers to choose from among new and used products. Source: Barnes & Noble website Source: Forrester Research, Inc.

6 Why Every Retailer Needs An Online Marketplace 5 Figure 1 Many Of Amazon s Competitors Are Launching Marketplaces (Cont.) 1-4 Best Buy marketplace Best Buy takes a very subtle approach to marketplaces by just informing the buyer that this item is fulfilled by another company. Source: Best Buy website Source: Forrester Research, Inc. Market Forces Combine To Make Marketplaces Newly Attractive However, Amazon s success is not the only factor driving the interest in marketplaces. There are a number of other factors fueling the interest, including slowed growth rates, awareness of revenue potential, and a testing ground for products and vendors ebusiness professionals might consider for their store or own online product mix. In specific, we see three other reasons: Profit is harder to find than ever. The challenging economic situation in North American and Europe has slowed consumer spending, and looming news suggests little hope of recovery any time soon. Additionally, consumers are increasingly shopping around for deals and are shifting their spending online. 2 As a result, traditional brick-and-mortar retailers are pressured for new ways to be profitable. By allowing third-party merchants to sell on their website, retailers hope to maintain or increase market share, win new customers, and gain additional revenue.

7 Why Every Retailer Needs An Online Marketplace 6 Marketplaces have the advantage that instead of gaining margin on a product by absorbing all of the operational costs, the retailer makes a profit of each sale in form of commission without the costs of storing and shipping the item. Consumers are comfortable buying from marketplaces. With the popularity of ebay and Amazon, most online buyers have experience buying from little-known third-party merchants and show little reluctance to do so (see Figure 2). According to a study that Forrester Research and Bizrate Insights recently fielded, 62% of North American online buyers have purchased from a marketplace, and 67% of North American online buyers trust a purchase through a marketplace offered via a familiar retailer s pages even if the third-party merchant selling the item is unfamiliar to them. 3 The retailers we interviewed that recently introduced marketplaces also confirmed that their online customers quickly adopted the marketplace and had little concern ordering from other third-party merchants. Technical execution is easier than ever. The technology investment for those retailers that want to build an online marketplace should not be underestimated but while in the past there has not been a plug-and-play solution for marketplace owners, companies like Merchantry (formerly Ixtens) provide this services and enable a relatively easy execution. Many vendors like Zoovy or ChannelAdvisor also have developed plug-and-play solutions for third-party merchants, making it easier to incorporate them into your marketplace.

8 Why Every Retailer Needs An Online Marketplace 7 Figure 2 Consumers Embrace Online Marketplaces 2-1 The majority of online buyers is familiar and open to marketplaces Have you ever purchased from one of these marketplaces? * I don t know 4% Are you familiar with marketplace websites where you can buy from multiple retailers with one shopping cart (e.g., other retailers on Amazon)? No 34% Yes 62% I don t know 11% Agree with following statement * No 36% Yes 53% Marketplaces offer convenience that I appreciate A marketplace has allowed me to locate items available for purchase online that I may not have otherwise found 86% 80% I trust a purchase through a familiar marketplace even if the retailer selling the item is unfamiliar to me 67% I am indifferent to marketplaces. I buy products I want wherever I find them 62% Base: US and Canadian recent online shoppers *Base: US and Canadian recent online shoppers who are familiar with marketplaces Source: Forrester/Bizrate Insights Q Marketplace Online Flash Survey Source: Forrester Research, Inc.

9 Why Every Retailer Needs An Online Marketplace 8 Figure 2 Consumers Embrace Online Marketplaces (Cont.) 2-2 Ratings and reviews of unfamiliar sellers have a strong influence on marketplaces buyers How do ratings and reviews of retailers in a marketplace influence your purchase decision? I will look for ratings and reviews only if I am not familiar with the retailer I will only consider a purchase if ratings and reviews are present 41% 47% Ratings and reviews don t have an impact on my decision I don t look for ratings and reviews because I trust the marketplace 3% 9% Base: US and Canadian recent online shoppers who have purchased on marketplaces Source: Forrester/Bizrate Insights Q Marketplace Online Flash Survey Source: Forrester Research, Inc. Online marketplaces Look Like drop-ship models but are not the same At its heart, an online marketplace is a group of products provided to shoppers on a retail website where the ownership and fulfillment of that merchandise rests with a third party (often another retailer or seller) but payment is captured by the initial retailer. Superficially, marketplaces bear many similarities to drop-ship programs, which many retailers use liberally to avoid buying and storing inventory. There are, however, several key differences between drop-shipments and marketplace business models (see Figure 3): Revenue attribution. The primary difference between drop shipments and marketplaces relates to how much revenue the retailer operating the program can book. For drop-ship orders the retailer is able to book 100% of the value of the transaction as their own revenue as they are the merchant of record and they assume all liability subsequent to capturing the order. For marketplaces the retailer typically only books the commission rate from the transaction, usually some low double-digit percent of the value of the transaction. That is why companies like Etsy and ebay report both gross merchandise value (GMV; actual transaction value) as well as revenue (commissions from marketplace sales). Maria Thomas, former CEO of Etsy, one of the world s largest artisan marketplaces says, ebay reports publicly both its GMV (on a supplemental basis) as well as net revenue. We did the same at Etsy. While GMV isn t revenue to the company, it is an important metric because it is an indicator of overall seller success and of the platform s ability to effectively scale as transaction volume increases.

10 Why Every Retailer Needs An Online Marketplace 9 Customer service and reverse logistics. Typically marketplace transactions encourage shoppers to address concerns or problems with shipments directly to marketplace sellers, at least initially. Returns are also often (but not always) shipped directly back to the marketplace seller. That is the advice that ebay and Amazon routinely give to shoppers who buy from those marketplaces. That said, other multichannel retailers that have chosen to protect their brands, such as Best Buy or Barnes & Noble, offer to address customer issues from their marketplaces. This latter approach is akin to traditional drop-ship programs in which there is little transparency to the customer that a third party has been engaged, and the presentation to the customer for all intents and purposes is that any subsequent issues should be addressed to the retailer. Maria Thomas, former CEO of Etsy, reinforces the value of the Best Buy/Barnes & Noble approach: For many customers the venue [where the consumer made the transaction] is the first stop for customer service even if the marketplace provider is not the merchant of record. Breadth of inventory. Drop-ship programs often tend to cherry pick a small assortment of products that will be featured in a store or on a website. Frequently, manufacturers or their direct distributors are the most common drop-ship partners for retailers; furthermore, many retailers cite that drop-ship partners are fewer in number and offer less robust inventory assortments than marketplace partners. Marketplaces often offer greater breadth and depth of merchandise, in many cases because they are comprised of other (lesser-known) retailers that have broad product assortments. The most robust marketplaces also offer rich capabilities for third-party merchants, enabling them to upload their own product catalogs and showcase items as they wish. Asian marketplaces such as Japan s Rakuten and Korea s GMarket are examples of such execution. Assumption of transaction risk. In general a marketplace is a venue that connects buyers and sellers, but these days there is a spectrum of marketplace models. On the one end there are pure marketplace models like Etsy, which for the most part is not the merchant of record and sellers ship products themselves through the selling platform. On the other end, Amazon s marketplace uses Amazon s cart and payment functionality but sellers can choose from a Chinese menu of options in terms of whether or not they to use Amazon s fulfillment services. In the middle, there are hybrid models like Fab that (at their best) are selling inventory online from a variety of merchants and then either drop-ship (products are shipped directly to the buyer from the manufacturer after the buyer completes a transaction on a retailer s site) or cross-dock (products are shipped to the retailer that has sold the product and the retailer reships the product to the buyer) from the manufacturer.

11 Why Every Retailer Needs An Online Marketplace 10 Figure 3 The Difference Between Drop-Shipping And Marketplaces 3-1 The drop-ship model Transfer of product ownership rights Physical product transfer Retailer Buyer Retailer Drop-shipper Drop-shipper Buyer Retailer lists product from drop-shipper on its website. Buyer buys product from retailer s website. Retailer buys product from dropshipper. Drop shipper ships product directly to buyer. Retailer books 100% of transaction value as own revenue. 3-2 The marketplace model Transfer of product ownership rights Physical product transfer Retailer Buyer 3rd-party seller Buyer retailer 3rd-party seller Retailer lists product from third-party seller on its website. Buyer buys product from retailer s website. Third-party seller ships product directly to buyer. Retailer books only commission rate from transaction. Retailer deposits funds into bank of third-party seller and takes commission on sale Source: Forrester Research, Inc.

12 Why Every Retailer Needs An Online Marketplace 11 Retailers love marketplaces for the flexibility and margin they offer While product selection is widely cited as the core reason for implementing a marketplace, the marketplace model offers numerous strategic advantages to retailers. Among them are improving customer experience, eliminating the burden of fulfillment, and increasing margins. In detail the reasons for running a marketplace are: Incremental revenue and margin. Because many retailers with marketplaces look to supplement their existing assortment, the marketplace attracts incremental dollar volume via new products. Retailers can also generate high-margin revenue because there are few variable costs associated with marketplace operations. Hassles such as markdowns are nonexistent in this model, and the companies operating marketplaces we interviewed cited that 5% to 30% of their total unit sales were sold on their marketplace. (The range varied based on how many items were included and the visibility of those items on a retail website.) Improved customer experience. Retailers also find that a marketplace enables them to provide a one-stop shop for their customers. Customers online tend to shop around only at a limited number of sites. Leveraging a marketplace to provide the broadest assortment increases the likelihood that a retailer captures customer sales that would go elsewhere and that the retailer will be considered for a broader set of future online purchases. Furthermore, the next generation of marketplaces will also likely integrate in-store pickup. Sites like Sears MyGofer are examples of that execution, in which consumers can order a wide variety of products from disperse sources and pick up items at a local store. New ways to test and feature products that are otherwise restricted. Retailers often have constraints around what they can distribute. One retailer we interviewed cited the marketplace as an opportunity to procure holdout products that picky brands only made available to niche retailers and partners. This not only enabled the retailer to offer shoppers that merchandise but ultimately enabled the retailer to have leverage in subsequent conversations with the holdout brand to ultimately procure that same product directly. A few Key Success Factors Are Critical for marketplace success Though marketplaces offer significant benefits, retailers nonetheless need to dedicate appropriate resources to optimize the marketplace s success. The marketplace model requires focus upfront to ensure that third-party merchant and shoppers are well supported and don t have issues along the selling process. While retailers with drop-ship programs have a bit of a head start with respect to passing along orders and onboarding new partners, there are other requirements specific to marketplaces that are necessary: Have a clear strategy. The key to a successful marketplace is first and foremost about deciding what your marketplace will be about is it ubiquitous product coverage like Amazon, or

13 Why Every Retailer Needs An Online Marketplace 12 specific to crafts like Etsy or vintage clothing like Asos? ebusiness executive need to make a clear strategy so as not to be me-too to Amazon and ebay. Upfront platform customization. Any new marketplace requires integrating third-party merchants with existing ecommerce platforms and content management systems. The majority of the overall technology investment will go into content management hosting capabilities. Most companies we spoke with, especially those that started a couple of years ago, have built the software platform to host a marketplace in-house. While there are now some vendors such as ChannelAdvisor that provide modules for sellers on marketplaces, retailers told us it was still hard to find a vendor that can build a platform for marketplace owners and integrate it with existing systems. Merchantry s marketplace platform is pre-integrated into a number of systems (e.g. Demandware, NetSuite, SAP, or Salesforce) and Merchantry can also perform custom integrations as required. Vendor integration to support third-party merchants. As a marketplace grows, the consistency and quality of content becomes less predictable. To support third-party merchants and to help them drive sales on retail sites, companies like ChannelAdvisor and Zoovy help with services like inventory and order management or reporting and analytics. While new marketplaces may not require third-party merchants to optimize their product feeds, a more mature marketplace can benefit from essentially outsourcing this aspect of seller management. In any case, even new marketplaces should create early standards that require consistency and quality of content. Dedicated human resources. In addition to selecting strong third-party merchants, the best marketplaces also maintain close relationships with those partners with dedicated marketplace teams. Seller account managers in these teams also proactively reach out to third-party merchants to improve their performance and source new sellers. Marketplace teams also quickly respond to customer complaints and delays in outbound shipments. The team size varies, but for retailers generating several million in marketplace gross merchandise value these dedicated teams can easily top more than a dozen employees. Marketplace Success Can Be Measured By Key Performance Indicators Marketplaces generate numerous metrics and have large volumes of data gathered from performance monitoring and customer feedback. To maximize the success of a marketplace, retailers should ensure strong performance in: Third-party merchant ratings. While many customers are likely to trust marketplace sellers because they trust the retailer s brand first and foremost, it is critical that all marketplace thirdparty merchants reinforce that brand. Retailers should continually monitor data on third-party merchants such as shipping times or packaging quality to ensure they meet agreed-upon

14 Why Every Retailer Needs An Online Marketplace 13 standards and should not hesitate to cut out any seller that consistently fails. Some retailers like French company Pixmania also look at total customer complaints post-transaction, knowing that marketplace sellers often tend to disappoint customers more than the retailer does (see Figure 4). To ensure brand integrity, many retailers such as Wal-Mart and Best Buy have launched marketplaces with a limited number of sellers to control the experience and learn from mistakes. Third-party merchant dashboards. Much of a retailer s marketplace team is dedicated to metrics associated with marketplace orders: fill rates, return rates, time to ship, delivery times, and concessions for expedited orders are all metrics that various retailers with marketplaces said that they scrutinized and shared with their third-party merchants. Figure 4 Pixmania Monitors Seller Performance With Consumer Ratings If a company s consumer ratings drop below a certain percentage, Pixmania will stop the relationship. Source: Pixmania website Source: Forrester Research, Inc.

15 Why Every Retailer Needs An Online Marketplace 14 Figure 5 Asos Keeps Its Marketplace In A Separate Domain From Its Main Webshop Asos marketplace is separated from Asos main webshop. Source: Asos website Source: Forrester Research, Inc.

16 Why Every Retailer Needs An Online Marketplace 15 Recommendations Marketplaces can be powerful, if they are executed well Marketplaces can deliver tremendous benefit for a retailer. But the caveat is that a poorly executed marketplace experience will not generate any of those benefits. In order to drive revenue and costs savings from online marketplaces retailers should: Dedicate appropriate resources. Overall, building and running a marketplace is a substantial technology investment and while outside vendors can help to support the process, ongoing support in the form of dedicated customer service team members and account managers will be critical to the growth of the program. Part of these resources are to ensure that third-party merchants have the appropriate guidelines to submit product feeds in a manner consistent with the retail site and deliver performance metrics back to sellers. Create extensive, accessible dashboards. Sharing the copious data available through marketplaces will also be essential to ensuring that third-party merchants are closely monitored and that the core brand experience is not compromised by clumsy marketplace execution. To ensure that marketplace items are always in stock for instance, some retailers will focus on particular products and source that product from multiple sellers, changing how those sellers are presented on pages depending on their inventory positions. Start slowly and work out any kinks. Many retailers start with a small number of marketplace partners to test the program. Often these programs are by invitation only, which also helps to manage poor content or disorganized sellers. Furthermore, some retailers find that a separate checkout for marketplace orders helps to manage the fulfillment and reverse logistics piece of the business (see Figure 5). But separating checkouts are often a poor user experience and not recommended best practice. Additionally, by starting small, retailers can understand aspects of web selling such as cross-border shipments (if a retailer chooses to ship outside of its home market). Supplemental MATERIAL Methodology Forrester partnered with Bizrate Insights to survey recent online shoppers for the Forrester/Bizrate Insights Q Marketplace Online Flash Survey. The survey was conducted from March 7 to March 18, 2012 and had a total of 11,736 respondents. All respondents were US and Canadian recent online shoppers. Age-related demographic breakdowns were defined as follows: Gen Y (under 30), Gen X (ages 30 to 44), Boomers (ages 45 to 64), and Seniors (65 and older). Questions were drafted by Forrester in conjunction with Bizrate Insights.

17 Why Every Retailer Needs An Online Marketplace 16 Companies Interviewed For This Report Barnes & Nobles Best Buy Buy.com JTV Neckermann Germany Pixmania Tesco Tradebyte Merchantry (Ixtens) Endnotes 1 Source: Q Amazon.com Inc Earnings Conference Call, Amazon.com Webcast Archives ( corporate-ir.net/phoenix.zhtml?c=97664&p=irol-audioarchives). 2 One impact of the recession has been to drive many consumers online for information about their purchases. Consumers are comparing prices as well as doing additional research to ensure that they are getting a good value for their money. When the recession in Europe was worst in 2009, a majority of European consumers, and 57% of low-to-middle-income shoppers, report that searching for cheaper goods online is a key reason for buying on the Net. Sixty-two percent of higher-income European shoppers also said that they shop online to find better value and/or deals. Please see the July 13, 2009, Trends 2009: European Online Retail report. 3 Source: Forrester/Bizrate Insights Q Marketplace Online Flash Survey.

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